5.3 - income statements Flashcards
what is profit?
the money made after all costs have been paid. It is used for dividends and retained profit.
what is cash?
money used and needed for day to day expenses e.g. raw materials, bills, wage, repaying loans.
If the business does no have enough cash it will struggle to survive
3 reasons why profit is important to private sector businesses?
- reward for risk - can use this reward to pay more dividends to shareholders to keep them satisfied
- a source of finance- profit can be used as retained profit so that the business doesn’t need to get a bank loan and pay interest
- indicator of success – high profitability will attract future investors to invest in the company. This money can be used for machinery, advertising or R & D
what is an income statement?
an income statement shows business owners and managers whether the business has made a profit or a loss.
what are the key features of an income statement?
- revenue
- costs of sales/goods sold
- gross profit
- expenses
- net profit (profit)
- retained profit
what is revenue?
money made from sales
price x quantity
what is cost of sales/goods sold?
the costs to make the product and are made up of variable costs. this can be calculated two ways:
1. adding all the variable costs e.g. raw materials, packaging, wages)
2. (Opening inventory (stock) + Purchases– Closing inventory) X cost per unit
what is gross profit?
revenue - cost of sales
what are expenses?
these are all other expenses of the business (Fixed Costs) E.g. Rent, salaries, depreciation of assets
what is net profit (profit)?
gross profit - expenses
what is retained profit?
the amount of profit that is reinvested back into the business, after dividends and taxes are paid
